The Construction Industry Scheme (CIS) affects businesses involved in construction - either as contractors or subcontractors. It also affects businesses that aren't themselves part of the industry, but which spend large amounts on construction work
The Construction Industry Scheme sets special rules for how tax and National Insurance contributions are dealt with when paying subcontractors.
Construction Industry Scheme - contractors and subcontractors
The Construction Industry Scheme applies to businesses involved in the construction industry. That includes builders, property developers, tradesmen, agencies supplying workers and so on. It can also apply to any business that spends an average of £1 million or more per year over three years on construction work, or more than £3 million in any 12 month period.
If you use subcontractors or spend large amounts on construction work, you count as a contractor under the Construction Industry Scheme.
The Construction Industry Scheme treats you as a subcontractor if you work for a contractor, for example, as a self-employed tradesman or a smaller construction company with your own employees. The Construction Industry Scheme doesn't apply to employees who are directly employed by the contractor.
You can be both a contractor and a subcontractor under the Construction Industry Scheme, for example, if your company works for a larger contractor and also subcontracts work out to self-employed tradesmen. Larger contractors can register as a 'multiple contractor'. This allows the business to divide itself into smaller 'divisions' for the purposes of CIS. Each division then operates as though it is a contractor in its own right.
Contractors and the Construction Industry Scheme
If you are a contractor, you must register with HM Revenue & Customs. Then, before you pay a subcontractor you need to check their employment status to find out whether:
- They qualify as an employee (in which case you must pay them through PAYE like other employees).
- They are self-employed and registered as a subcontractor with HMRC. If they are registered, HMRC will tell you whether you should pay them gross or should make a standard deduction of 20% from payments.
- They are not registered with HMRC. If so, you will need to verify the subcontractor with HMRC. If HMRC verifies the subcontractor, HMRC will tell you to make the standard 20% deduction from payments. If HMRC cannot verify the subcontractor, HMRC will tell you to make deductions at the higher rate of 30%.
You must verify whether a subcontractor is registered by using the HMRC Online service or commercial software. You will need the subcontractor's tax reference and their National Insurance number (if they are a sole trader) or company details.
If you need to make deductions, you give the subcontractor a written statement showing the details. You pay over the deductions to HMRC either monthly or quarterly, depending on the amounts involved. You also complete Construction Industry Scheme returns for HMRC whenever you pay subcontractors.
You should make sure that any payroll service or software you use can handle the requirements of the Construction Industry Scheme.
Subcontractors and the Construction Industry Scheme
If you are a subcontractor, you must register with HMRC by calling the CIS helpline before you start work. Registering under the Construction Industry Scheme improves your cash flow as contractors have to make deductions when paying your invoices. Instead of deductions being made at 30%, they are made at 20% or in some cases not at all.
- Normally, 20% of the invoice value is deducted.
- If you are not registered with HMRC or they have been unable to verify you, 30% is deducted.
- If your turnover is at least £30,000 for a sole trader, or £30,000 for each partner or Director, or at least £100,000 for the whole partnership or company, and you have a record of good tax compliance, you can apply to HMRC to qualify for gross payment, without any deductions.
Deductions are not made in relation to VAT charged on an invoice or direct costs such as materials and equipment hire for the contract.
Any deductions made count towards the tax and National Insurance contributions you have to pay — either through tax self-assessment (if you are self-employed) or the PAYE system (if you are a limited company). If the deductions are more than the total due to HMRC, you can claim a refund.